Industrial Logistics Properties Trust(US:ILPT)2021-02-18 21:25Part I Business ILPT is a REIT specializing in industrial and logistics properties, pursuing growth through rent resets and e-commerce-focused acquisitions - | Metric | Wholly Owned Properties | Unconsolidated Joint Venture (22% equity interest) | | :--- | :--- | :--- | | Number of Properties | 289 | 12 | | Rentable Square Feet | ~34.9 million | ~9.2 million | | Occupancy | ~98.5% | 100% | | Weighted Avg. Lease Term | ~9.5 years | 7.1 years | | Geographic Split (Annualized Rental Revenues) | Hawaii: 50.7%, Mainland: 49.3% | N/A | - The company's growth strategy is twofold: internal growth through rent resets (especially in Hawaii) and fixed lease escalations, and external growth by acquiring industrial and logistics properties that serve the e-commerce sector363739 - During the COVID-19 pandemic, ILPT granted rent deferrals of $3.2 million to tenants representing 9.6% of annualized rental revenues, collecting approximately 97.6% of contractual rents due after accounting for these deferrals47 - ILPT has no employees and relies on RMR Group LLC (RMR LLC) for all personnel and services required to operate its business, under long-term business and property management agreements4867 Material U.S. Federal Income Tax Considerations This section details the complex requirements for ILPT to qualify and maintain its REIT status and the tax implications for shareholders - The company has elected to be taxed as a REIT, which generally exempts it from federal income tax on distributed net income, provided it adheres to strict qualification tests8081 - To maintain REIT status, ILPT must annually distribute at least 90% of its REIT taxable income and satisfy two gross income tests: at least 75% of gross income must be from real property investments, and at least 95% must be from a combination of real property income and other passive income sources like dividends and interest101115 - Distributions to shareholders are generally not eligible for the preferential tax rates on qualified dividend income, typically taxed at ordinary income rates for noncorporate U.S. shareholders, though eligible for a deduction under Section 199A of the IRC through 202581130 ERISA and Other Retirement Plan Considerations This section addresses fiduciary considerations for ERISA and other retirement plans investing in ILPT, noting that ILPT's shares are publicly offered securities - Fiduciaries of ERISA and other retirement plans must ensure that an investment in ILPT shares satisfies diversification, prudence, and other fiduciary responsibilities under applicable laws162163 - ILPT's assets are not expected to be deemed "plan assets" of investing ERISA or Non-ERISA plans because its shares qualify as "publicly offered securities," which are widely held and freely transferable166172 Risk Factors This section outlines significant risks including tenant dependency, geographic concentration, COVID-19 impacts, debt, and external management conflicts - Business risks include dependence on tenants' financial health, potential inability to renew leases on favorable terms, and concentration in the industrial/logistics sector and single-tenant properties177178181 - A significant number of properties are located on Oahu, Hawaii, exposing the company to geographic concentration risks such as natural disasters and local economic conditions182 - The COVID-19 pandemic poses risks of tenant defaults, reduced demand for logistics space if economic conditions worsen, and potential disruptions to leasing activities183184 - The company's relationship with its external manager, RMR LLC, presents risks of potential conflicts of interest, as RMR LLC manages other entities with similar investment objectives and its fee structure may not always align with shareholder interests225229 - Financial risks include the inability to access reasonably priced capital, failure to comply with debt covenants, and adverse effects from changes in market interest rates, including the phase-out of LIBOR202207208 Properties ILPT's wholly owned portfolio comprises 289 properties across 31 states, totaling 34.9 million square feet, with a significant concentration in Hawaii - Wholly Owned Properties by State (Top 5 by Annualized Rental Revenues) | State | Number of Properties | Annualized Rental Revenues (in thousands) | | :--- | :--- | :--- | | HI | 226 | $105,341 | | OH | 10 | $13,008 | | SC | 4 | $9,688 | | IN | 5 | $9,482 | | TN | 2 | $6,485 | - As of December 31, 2020, 186 properties located in Oahu, HI, with an undepreciated carrying value of $505.2 million, were encumbered by mortgages totaling $650.0 million261 Legal Proceedings The company is not currently involved in any litigation expected to have a material adverse effect on its business - The company is not currently involved in any litigation expected to have a material adverse effect on its business263 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ILPT common shares are traded on Nasdaq under the symbol "ILPT", with 1,965 shareholders of record as of February 15, 2021 - ILPT common shares trade on Nasdaq under the symbol ILPT266 - As of February 15, 2021, there were 1,965 shareholders of record266 Management's Discussion and Analysis of Financial Condition and Results of Operations ILPT's 2020 financial performance showed significant growth in rental income and net income, driven by acquisitions and a real estate sale, while maintaining strong occupancy and liquidity - Consolidated Financial Results (Year Ended Dec 31) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Rental Income ($M) | $254.6 | $229.2 | 11.1% | | Net Operating Income (NOI) ($M) | $198.6 | $181.2 | 9.6% | | Net Income Attributable to Common Shareholders ($M) | $82.1 | $52.5 | 56.3% | | Net Income per Share (Diluted) ($) | $1.26 | $0.81 | 55.6% | | Normalized FFO per Share (Diluted) ($) | $1.86 | $1.76 | 5.7% | - The increase in net income was primarily driven by a $24.0 million gain on the sale of real estate, which resulted from the deconsolidation of and sale of an equity interest in a joint venture and the sale of one other property301 - During 2020, the company entered new and renewal leases for 1.1 million sq. ft. at rental rates 14.7% higher than prior rates, with rent resets for 1.9 million sq. ft. in Hawaii resulting in rates 20.1% higher than prior rates275 - In 2020, ILPT formed a joint venture for 12 properties, initially retaining a 61% interest, then selling an additional 39% interest for $108.8 million, reducing its stake to 22% and deconsolidating the joint venture from its balance sheet287288 Property Operations As of year-end 2020, ILPT's portfolio maintained high occupancy and increased rental rates, with minimal near-term lease expirations - Occupancy and Rental Rates | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Percent Leased (All Properties) | 98.5% | 99.3% | | Percent Leased (Comparable Properties) | 98.3% | 98.9% | | Avg. Effective Rental Rate/Sq. Ft. (All Properties) | $6.06 | $5.83 | | Avg. Effective Rental Rate/Sq. Ft. (Comparable) | $6.23 | $5.92 | - Top 3 Tenants by Annualized Rental Revenue (as of Dec 31, 2020) | Tenant | % of Total Annualized Rental Revenues | | :--- | :--- | | Amazon.com Services, Inc. | 10.0% | | Federal Express Corporation / FedEx Ground | 4.6% | | Restoration Hardware, Inc. | 3.0% | - The company has limited near-term lease expirations, with only 1.4% of total annualized rental revenues scheduled to expire in 2021277 Liquidity and Capital Resources ILPT maintains strong liquidity through tenant rents and its revolving credit facility, supported by a high percentage of investment-grade tenants - Liquidity Position as of December 31, 2020 | Item | Amount (in thousands) | | :--- | :--- | | Cash and Cash Equivalents ($) | $22,834 | | Revolving Credit Facility Availability ($) | $529,000 | | Revolving Credit Facility Outstanding ($) | $221,000 | | Mortgage Notes Payable (Principal) ($) | $650,000 | - The company believes it is well-positioned due to its liquidity, with 72.2% of annualized rental revenues derived from investment-grade tenants or Hawaii land leases, and only 1.4% of revenues from leases expiring in the next 12 months317 - The company's credit agreement contains covenants requiring maintenance of certain financial ratios, with compliance maintained as of December 31, 2020337 Quantitative and Qualitative Disclosures About Market Risk ILPT's primary market risk is interest rate exposure, with a hypothetical 1% rate increase impacting annual interest expense by $2.2 million and EPS by $0.03 - Debt Structure as of December 31, 2020 | Debt Type | Principal Balance ($) | Interest Rate Type | | :--- | :--- | :--- | | Mortgage Notes | $650,000 | Fixed (4.31%) | | Revolving Credit Facility | $221,000 | Floating (LIBOR + 1.55%) | - A hypothetical 1% increase in interest rates would increase annual interest expense on the $221 million of floating-rate debt by approximately $2.2 million, reducing annual EPS by $0.03353 - The company acknowledges the expected phase-out of LIBOR and anticipates its credit agreements will be revised or amended to use an alternative rate that approximates the existing interest rate calculation357 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The President and CEO, along with the CFO and Treasurer, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020360 - Management's assessment, based on the COSO framework, concluded that internal control over financial reporting was effective as of December 31, 2020363 Part III Directors, Executive Officers, Corporate Governance, and Related Matters Information on directors, executive officers, corporate governance, and related matters is incorporated by reference from the 2021 Proxy Statement - Information regarding directors, executive compensation, security ownership, and related party transactions is incorporated by reference from the company's 2021 Proxy Statement369370373374 - Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by securityholders | None | None | 3,698,912 | Part IV Exhibits and Financial Statement Schedules This section includes the company's audited consolidated financial statements, accompanying reports, and a list of all exhibits filed with the 10-K Consolidated Financial Statements The consolidated financial statements present ILPT's financial position, results of operations, and cash flows, reflecting asset and liability changes due to a joint venture deconsolidation - Key Balance Sheet Figures (as of Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Real Estate Properties, net ($M) | $1,667.7 | $2,204.5 | | Total Assets ($M) | $1,915.7 | $2,454.9 | | Total Liabilities ($M) | $912.6 | $1,459.2 | | Total Shareholders' Equity ($M) | $1,003.2 | $995.7 | - Key Income Statement Figures (Year Ended Dec 31) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Rental Income ($M) | $254.6 | $229.2 | $162.5 | | Total Expenses ($M) | $146.2 | $127.1 | $72.2 | | Net Income ($M) | $81.2 | $52.5 | $74.4 | - Key Cash Flow Figures (Year Ended Dec 31, 2020) | Activity | Net Cash Flow ($M) | | :--- | :--- | | Operating Activities | $114.6 | | Investing Activities | ($4.5) | | Financing Activities | ($121.8) | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies, joint venture transactions, debt structure, related party agreements, and shareholder equity information - The company's joint venture transaction in 2020 involved contributing 12 properties, initially consolidating the VIE with a 61% interest, and later deconsolidating it after selling down to a 22% interest, resulting in a net gain on sale of $23.4 million459461 - As of Dec 31, 2020, the company's outstanding debt included $221 million on its revolving credit facility and a $650 million mortgage note, maturing in Dec 2021 (with extension options) and Feb 2029 respectively472475477 - The business management fee paid to RMR LLC is calculated based on the lower of the historical cost of real estate assets or the company's average market capitalization, with property management fees at 3.0% of gross collected rents and construction supervision fees at 5.0% of construction costs498506 - In 2020, the company paid total distributions of $1.32 per common share, characterized as 71.0% ordinary income and 29.0% return of capital495